Open AccessMonetary and Financial Instability and European Bank Interest Margins
Author(s) -
Victor Mendes,
Margarida Abreu
Publication year - 2018
Publication title -
international finance and banking
Language(s) - English
Resource type - Journals
ISSN - 2374-2089
DOI - 10.5296/ifb.v5i1.13000
Subject(s) - interest rate , net interest margin , balance sheet , economics , monetary economics , exchange rate , monetary policy , market liquidity , interest rate parity , financial market , net interest income , financial system , business , international economics , finance , stock exchange , return on assets
This paper studies the extent to which financial instability and monetary and exchange rate policy influence European bank net interest margins, controlling for microeconomic variables and allowing for the heterogeneity of the banking industry. The sample is a broad cross-section of balance sheet and income statement information provided by banks from 12 European countries.We conclude that European banks are sensitive to exchange rate and interest rate volatility. They are also affected by their home country’s vulnerability to balance of payment and currency crises, but we find that banks feel differently about the associated risk of liquidity problems depending on their specialization. The instability of international financial markets is not good for banks, insofar as interest and exchange rate volatility both have a negative impact on the net interest margin.